Homeowners Struggle to Keep Up...

Homeowners Struggle To Keep Up With Adjustable Rates

By Noelle Knox, USA TODAY
Mon Apr 3, 7:00 AM ET



For 45 years, Robert and Lorraine Brown have lived in their ranch-style home in Florissant, Mo. One of their four children was even born there. But for the past eight months, the couple have been locked in a sleep-wrecking race to keep up with their rising mortgage bills. They've switched to cheaper phone service, cut back on groceries and sometimes put off ordering medicine.


When they refinanced their home two years ago to pay off some bills, Robert, now 78, was working as a deliveryman. But his employer went out of business last April. Now he and Lorraine, 72, a retired nurse, are both seeking work. The rate on their mortgage has jumped from 7% to 10.5%.


"We were having a hard time meeting bills at the time we refinanced. It seems once you get behind, you do desperate things to catch up, and you never do," says Lorraine, trying to hold back tears. "At the time of the loan, they tell you, 'Well, it may go up, but it's probably going to go down.' You want it to be so, so you believe it."


They feel alone, but they're not. America's five-year real estate boom was fueled partly by a tempting array of cut-rate mortgages that helped millions of Americans qualify for home or refinance loans. To afford soaring home prices, many turned to adjustable-rate and other, riskier loans with low initial payments. The homeownership rate hit a record 70%.


Now, the real estate market is cooling, interest rates are rising and tens of thousands more Americans are starting to have trouble paying their mortgages. Nearly 25% of mortgages - 10 million - carry adjustable interest rates. And most of them went to people with subpar credit ratings who accepted higher interest rates, according to the Mortgage Bankers Association.


"Within the last year, I would say 60% to 70% of calls to our hotlines are issues related to ARM (adjustable-rate mortgage) loans," says Chris Krehmeyer, executive director of Beyond Housing, a non-profit group that offers homeownership support services in St. Louis. "That's significantly higher than in years past, because the ARMs are coming home to roost."


Last week, the Federal Reserve raised interest rates for the 15th time since June 2004 and signaled that at least one more increase is likely. That trend is ominous for borrowers who were seduced by adjustable-rate loans that offered interest-only payment options or teaser rates below 2% or that let the borrower pay less than the interest owed. They will face bigger payment shock once their loans reset to higher rates.


The number of borrowers in trouble will rise this year and peak in 2007 and 2008 as the largest number of mortgages reset to higher rates, according to First American Real Estate Solutions, a real estate data provider.


Already, in West Virginia, Alabama, Michigan, Missouri and Tennessee, about one in five homeowners with a high-interest (subprime) ARM was at least 30 days late at the end of last year, according to the Mortgage Bankers Association. After 90 days, the foreclosure clock starts ticking.


Most of those foreclosures are related to job losses in auto and garment factories; higher mortgage payments were often the last straw.


What worries experts such as Christopher Cagan at First American Real Estate Solutions are the adjustable-rate loans made in 2004 and 2005, at the end of the housing boom. These loans were concentrated in the hottest markets, such as California, where about 60% of all loans last year were interest-only or payment-option ARMs. That's the highest such rate in the country.


Of the 7.7 million households who took out ARMs over the past two years to buy or refinance, up to 1 million could lose their homes through foreclosure over the next five years because they won't be able to afford their mortgage payments, and their homes will be worth less than they owe, according to Cagan's research.


The losses to the banking industry, he estimates, will exceed $100 billion. That's less than the damage from the savings-and-loan crisis in the 1990s, which cost the country $150 billion. "It will sting the economy, but it won't break it," he says.


'What can we do?'


In the Atlanta area, credit counselors for The Impact Group say 85% of their calls are now related to ARM or interest-only loans. The calls start "when the statement hits them with the new monthly payment," says Marina Peed, executive director for the non-profit group, which offers homeownership education, counseling and financial services. "They are calling and asking, 'What can we do?' "


The call volume jumped after January, as holiday credit card bills, higher gas bills and rising mortgage payments hit some borrowers at the same time.


When Paul and Sandra Wilson moved from California, where they couldn't afford to buy a home, to Georgia in May 2004, they bought a house with an interest-only loan. But Paul, 52, has had a tough time finding work, and they lost most of their savings in a business venture. They refinanced to an ARM with a lower rate but one that reset every six months and that charges a $20,000 penalty if they refinance within three years.


The loan broker "convinced us that it was in our best interest, and in most likelihood within six months our financial situation would turn around and we were going to look at selling," says Sandra, 53, a former law enforcement officer who is disabled.

In less than a year, their loan payment jumped from $2,275 to more than $2,800. The couple filed for bankruptcy and will lose their home next month. "This was our fourth home," Sandra says. "It's not as if we weren't aware, but we'd never had an adjustable-rate mortgage before."

Banking regulators are concerned about risky loans made to people with precarious finances or those who didn't understand the complex terms and the peril they could face if interest rates rose.

In December, regulators proposed new guidelines for mortgage lenders to crack down on loose lending practices. The rules would require better risk disclosure and a fuller analysis of the borrowers' ability to repay the loan through maturity - and at the highest rates allowed under the loan terms.

Bank trade groups complained that concerns were overblown. "We do not believe it is appropriate or possible for the lender to dictate the best mortgage products for individual consumers," America's Community Bankers responded.

No matter what the final guidelines say, they will be too late to help people such as Susan Cambero. She got into trouble after she took out an equity line of credit on her home in Lilburn, Ga., to pay off her car and other bills. As a single mother with total income of $38,000 a year, including child support, she never would have been able to qualify for the $57,000 line of credit from a conservative lender. That line of credit, when added to the balance on her fixed-rate mortgage, totaled $10,000 more than her home was worth.

The monthly payments for the equity line have more than doubled in four years, to about $400. (She also has a $700-a-month mortgage and hefty credit card bills.) "I can pay it, but I have nothing left over to eat," says Cambero, a contract analyst for a computer company. "I'm going to lose my house."

Some success stories

There are few resources to help homeowners in dire financial straits, but there are some. The Homeownership Preservation Foundation offers free credit counseling and referrals, 24 hours a day, seven days a week (888-995-HOPE, or 888-995-4673). And NeighborWorks America, a national non-profit that supports homeownership and financial literacy, has member groups in every state.

One of its members, Neighborhood Housing Services of Chicago, has been receiving about five calls a day since January from borrowers who are falling behind on ARMs.

Marilyn Maxwell is one of their success stories. She refinanced her loan in 2002. Maxwell, 58, is a former U.S. postal worker who's living on disability payments from the government. She agreed to an ARM that reset every six months.

She kept up with her payments on her house on the southeast side of Chicago until last April, after her daughter, who was helping Maxwell pay the mortgage, lost her job. Last week, Maxwell refinanced her home with the help of Neighborhood Housing Services. She got a 6.8%, fixed-rate loan, plus grants to help make long-neglected repairs.





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